Impact of the Fed:

Assume that bond market participants suddenly expect the Fed to substantially increase the money supply.

a. Assuming no threat of inflation, how would bond prices be affected by this expectation?

b. Assuming that inflation may result, how would bond prices be affected?

c. Given your answers to (a) and (b), explain why expectations of the Fed's increase in the money supply may sometimes cause bond market participants to disagree about how bond prices will be affected.